Web-only version: City manager to ask council to stop paying bonds, OK mediation

Central Valley Business Journal, February 2012

By KEITH MICHAUD/Business Journal Editor

STOCKTON – Officials will ask the City Council on Tuesday to approve various fiscal adjustments, suspend payments on $2 million in bonds, and OK financial mediation to prevent the city from plunging closer to bankruptcy.

“It’s about restructuring,” Stockton City Manager Bob Deis told reporters in outlining the city’s “dire fiscal situation” and the proposed plan to avoid insolvency. “It’s not about bankruptcy. … Despite what’s been reported, we are not asking the council to file Chapter 9.”

Deis and his staff are proposing the move to cover the anticipated $15 million deficit through June and to give city staff a chance to meet with creditors, retirees, current employees , and other interested parties in state-mandated mediation. Assembly Bill 506 requires that cities now seek mediation to mitigate their financial problems before declaring bankruptcy. Bankruptcy attorney Marc Levinson, whose law firm worked on the city of Vallejo bankruptcy, was on hand to explain the mediation.

“The mediation then proceeds over the next 60 days unless agreement is reached sooner,” according to material Levinson made available. “It may be extended an additional 30 days if requested by the (city) or a majority of interested parties.”

As it is, Deis forecast the city would face a $20 million to $38 million deficit for the 2012-13 fiscal year.

“The ‘best case’ assumes we continue to declare an emergency and continue to impose labor concessions,” read a portion of Deis’ report to the City Council in the agenda packet. “The $38 million assumes we lose in court with unions concerning the effects of prior fiscal emergency declarations and we must ‘turnoff’ past concessions.”

Several factors resulted in the financial problems facing Stockton, said Deis, including past bookkeeping errors and fiscal mismanagement.

“It is apparent that past financial practices of former city staff and possibly contractors, that were not disclosed to the (City Council), have contributed to the city’s current financial situation,” wrote Deis in the report to the City Council. “Given the grave consequences now being faced by the city, the city manager and city attorney wish to investigate these practices for possible recourse.”

Deis did not anticipate a criminal investigation, he told reporters, but instead a probe that could result in civil remedies.

A greatly expanded city retiree health insurance commitment in the 1990s appears to be legal, Deis said Friday, but unsound and had characteristics of a Ponzi scheme.

“We are now at the back end of the ‘scheme’ and are having to pay for it,” Deis wrote. “Next year, we expect to pay more for retiree health insurance than for our current employees. This coupled with enhanced retirement benefits, accelerated the problem.”

The city also issued a huge amount of debit betting on “hyper growth” in the past decade would continue, and now the general fund is backfilling some of that debit. Generous labor contracts over the years were unsustainable, said Deis, and mediation will include labor groups. The recession in the Central Valley and the state’s “raiding of our funds” also has worsened the fiscal picture.

“No one of these factors is the cause of our current problem,” Deis wrote. “However, the interplay of all these factors has created a situation where we can’t ‘grow our way’ out of the problem and no amount of forward looking financial planning will properly fix it.”

Deis said Friday that even further public safety cuts were “not acceptable,” compensation reduction for current employees would hurt the city in the long run by preventing the city from attracting the best people for city jobs, and higher taxes, especially with the region’s high unemployment, would not have community support.

“We see no viable alternative to restructuring our finances,” said Deis. “We see a healthy future for Stockton.”

Deis was also clear to say that the current City Council was not to blame for the current situation and that city staff that had been responsible were “long gone.”

Contact the author about this and other stories at kmichaud@cvbizjournal.com.